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In the medium term, I think states issuing their own currency and bypassing the Fed would be messy but not impossible. Especially if a state issued a parallel currency only for use within that state; then people could still use federal currency to pay federal tax, at least until there were no more federal currency reserves in the state. Federal tax would be the biggest hitch.

The second-biggest hitch would be the federal gov’t benefits and subsidies that individuals and local economies rely on to survive. The states could step in and use their own currency to replace any lost federal benefits and subsidies, while simultaneously stimulating the state’s economy (which it could do simply by issuing its own currency and making its own loans to small businesses) and thereby creating an environment with more jobs, where fewer people needed federal benefits to survive.

That takes care of the major liabilities to and from the federal gov’t, with the exception of Treasury securities (Treasury notes, bills, and bonds, held principally by pension funds). At this point, I don’t think anybody should be relying on the value of Treasury securities in the longer term, but I’m not very knowledgeable about that.

The federal trade deficit would be immaterial in this scenario. The state would, however, need a means of exchange to pay for goods imported from out of state. That’s perhaps the biggest problem. Historically, countries have used gold or an agreed-upon (often gold or gold-backed) reserve currency for this purpose. Maybe this is why a few American states, like Texas, have started accumulating bullion.

States that did this would probably need to band together to counter the giant pushback they’d get from Mr. Global and his central banks. It’s hard but could all be done.

Sorry for the dissertation… I got carried away!